Economic impact analysis

• Author: Development Solutions Europe Limited, Directorate-General for Trade (European Commission)
• Pages: 41-92

EUROPEAN COMMISSION

41

2 Economic impact analysis

This section will discuss the economic impact of the GSP on the beneficiary countries. It

will address the following evaluation questions:

i. What has been the impact of the present scheme on developing countries and

LDCs?

ii. What are the factors influencing the achievements observed?

iii. What unintended consequences, if any, can be linked to the design,

implementation, or use of the current GSP?

Firstly, a brief overview of the available evaluations on the economic impact of the

previous GSP will be presented in Section 2.1. Secondly, an overview of tariffs and

preference margins will be presented (Section 2.2.1), as well as detailed analyses of

trade flows under the various components of the GSP (Section 2.2.2). It will contrast

the impact before the introduction of Regulation No.978/2012 (during 2011-2013, which

is referred to as the pre-reform period) with the period of implementation of the

Regulation (2014-2016, which is referred to as the post-reform period). Furthermore,

the section will present econometric estimates of impact of the GSP Regulation using a

gravity modelling approach (Section 2.3) as well as estimates of the determinants of

preference utilisation rates (Section 2.4).

2.1 Lessons learnt from previous evaluations

The expected economic impact of the GSP on the beneficiary countries is premised on

the hypothesis that preferential market access encourages higher economic growth as a

result of increased export opportunities due to lowering market access barriers.

Furthermore, it is expected that preferences may increase exports at the intensive

margin (that is, where countries increase their existing exports), as well as at the

extensive margin (where countries widen or diversify the range of products that are

exported). Along with the EU market providing an economic driver for growth and

development, it is anticipated that beneficiary countries may also benefit from improved

access to regional and global markets, as well as from increased inflows of Foreign Direct

Investment (FDI).

However, it has been noted that participation in a preferential tariff regime is merely one

out of many factors that may propel the growth of an economy. The scheme operates in

an overall bigger context in which trade preferences can only serve a s a facilitator, albeit

a highly significant one, in assisting a beneficiary country to achieve its growth and

development objectives.40

Evaluation studies indicate that the GSP has led to an increase in exports from

developing countries to the EU and has had an overall positive effect on the economic

and social development of the respective countries.41 However, the level of exports to

the EU differs a great deal among GSP beneficiaries. In 2010, it was found that the EU

imports under the GSP from East Asia, the Pacific and South Asia are significantly

greater than any other countries or regions included in the GSP.42

40CARIS.(2010). Mid-Term Evaluation of the EU’s Generalised System of Preferences, p. 12.

41CARIS.(2010). Mid-Term Evaluation of the EU’s Generalised System of Preferences. Rahman M. (2014). Trade

Benefits for Least Developed Countries: the Bangladesh Case. Available at:

http://www.un.org/en/development/desa/policy/cdp/cdp_background_papers/bp2014_18.pdf. Copenhagen

Economics.(2015). Assessment of Economic Benefits Generated by the EU Trade Regimes towards the

Developing Countries. Available at: http://trade.ec.europa.eu/doclib/docs/2015/july/tradoc_153595.pdf

42CARIS.(2010). Mid-Term Evaluation of the EU’s Generalised System of Preferences.

EUROPEAN COMMISSION

42

It was also observed that the economic impact of the EU’s GSP in the beneficiary

countries is measurable after a relatively short period of time. The Copenhagen

Economics study on the economic benefits generated by the GSP arrangement in

developing countries finds that the sizeable impact on exports is recognizable, on

average, within two years after preferences have been granted.43

Importantly, the share of total EU imports which entered under the GSP is relatively

modest. In 2008, under the previous GSP Regulation, only 5.1 per cent of total EU

imports were under GSP, with imports under the Standard GSP arrangement accounting

for 4.18 per cent, while 0.46 per cent and 0.46 per cent of EU imports entered under

GSP+ and EBA arrangements, respectively.

The GSP i ntends to stimulate a beneficiary country’s economic growth by wideni ng their

preference margins, thereby contributing to the respective country’s competitiveness.

However, as trade barriers are generally lowered via multilateral trade liberalization as

well as regional or bilateral FTAs, the value of the GSP trade preferences is bound to

diminish. Several studies have paid attention to this development of preference erosion

and have investigated the changes of preference margins over time.44

Research on the impact of trade preferences under the previous GSP Regulation noted

that there were a significant number of sectors where GSP preferences had been

completely eroded and several exports from GSP beneficiary countries utilise the full

Most Favoured Nation (MFN) tariff (i.e. where the MFN tariff is equal to zero).45 For

example, a case study on Mozambique, presented in the 2010 Mid-Term Evaluation of

the EU ’s GSP Report, suggests that the impact of t he pr eference regi me is likely to be

overstated, because a significant number of products exported by developing countries

do not benefit from any positive preferential margin since they enter the EU under MFN

= 0 duties.46 This has significant implications for the impact of the GSP, which critically

depends “on the extent of that preference margin, as well as on the relationship between

that margin, and the incentive for firms and countries to utilise the preferences on

offer.”47

There are some differences in opinions in the evaluation literature as to where eventual

tariff margins and preference rents are absorbed. Some case studies, like the one on

Mozambique, argue that exporters may be unable to capture the price margin related to

the trade preferences.48 Other studies contest this and indicate that export prices and

the preference rents of the decreased tariffs are at least partly captured by the

exporters.49 The CARIS 2 010 eval uation states that “both market share and the size of

the preference margin are positively transmitted to the price margin, which suggests

that preference margins are transmitted to exporters.”50

The evaluation literature further suggests that the EU’s GSP has had a positive impact on

countries’ export diversification. The theoretical expl anations for this exp ected benefit

are rooted in the infant industry assumption as well as the more recent heterogeneous

43Copenhagen Economics. (2015). Assessment of Economic Benefits Generated by the EU Trade Regimes

Towards the Developing Countries, p. 17.

44CARIS.(2010). Mid-Term Evaluation of the EU’s Generalised System of Preferences; Cirera, X. (2010).The

Impact of Trade Preferences on Export Prices in the European Union – Who Captures the Preference Rent?

45Cirera, X. (2010).The Impact of Trade Preferences on Export Prices in the European Union – Who Captures

the Preference Rent?p. 22.

46Cirera, X. and Alfieri, A. (2011).Unilateral Trade Preferences in the EU: An Empirical Assessment for the Case

of Mozambican Exports, p. 9.

47CARIS.(2010). Mid-Term Evaluation of the EU’s Generalised System of Preferences, p. 13.

48Cirera, X. and Alfieri, A. (2011).Unilateral Trade Preferences in the EU: An Empirical Assessment for the Case

of Mozambican Exports, p. 9.

49CARIS.(2010). Mid-Term Evaluation of the EU’s Generalised System of Preferences, p. 69; Cirera, X.

(2010).The Impact of Trade Preferences on Export Prices in the European Union – Who Captures the

Preference Rent?

50CARIS.(2010). Mid-Term Evaluation of the EU’s Generalised System of Preferences, p. 96.

EUROPEAN COMMISSION

43

firm trade theory. In short, both theoretical perspectives place importance on

preferential treatment for young recently established industries. In doing so, it is

suggested that through the reduction of trade barriers, more firms and producers a re

encouraged to export.

Trade preferences have often also been criticized for creating an incentive to specialize in

a few products that are given preferential access or prevent the beneficiary countries

from adopting more liberal trade policies. Gamberoni (2007) suggests that unilateral

trade preferences have led to an anti-diversification effect in the case when preferences

have been granted under permanent and stable schemes.51 Nevertheless, the 2013 IFN

study on the EU’s i mpact on export diversifi cation suggests that the EBA and GSP+ have

had a significantly positive effect on export diversification.52

The evaluation literature on the utilisation of preferences show that the majority of EU

imports from developing countries enters the EU under zero duties and that EU

preferences are well used.53In cases where preference utilisation is low, the volume of

imports dutiable and hence potentially eligible for preferences is also often low. An

exception appears to be EU imports of textiles and textile articles from the non-ACPs

LDC and from ASEAN, which may be related to restrictive EU Rules of Origin (RoO) in

that particular sector, rather than it being a general phenomenon. Around 90 per cent of

preference-eligible imports in Canada, the EU and the US use available preferences.54

Preference utilisation was also found to increase depending on the size of the preferential

margin and the export value.55 Additionally, where the utilisation of preferences was low,

it was found that the preferential margin was small, thus suggesting that compliance

costs may be low but not negligible. Nevertheless, it should also be noted that many

imports with small preferential margins feature high utilisation rates, even where

significant administrative costs exist.56

The literature further explains that non-utilisation of preferences is mainly due to the

costs of compliance associated to preferential regimes. 57 An important element to

consider is compliance with product specific rules of origin. In order to be eligible for

preferential treatment, exporters need to comply with rules that establish a minimum

threshold of domestic transformation in the production process from inputs imported

abroad. While trying to avoid export deflection of finished products from non-preferential

countries, rules of origin may indirectly discourage some forms of outward processing

and outsourcing as these would be categorized as originating in non-preferential

partners. The absence of the relevant local production capacity for such inputs would

effectively render certain locally-produced finished goods (despite being covered by the

trade agreement) ineligible for preferential market access. 58This may have affected a

substantial share of trade flows.

51 Gamberoni, E. (2007) Do unilateral trade preferences help export diversification? An investigation of the

impact of European unilateral trade preferences on the extensive and intensive margin of trade. HEI Working

Paper, No. 17/2007

52Persson, M. and Wilhemsson, F. (2013).EU Trade Preferences and Export Diversification, p. 25.

53Nilsson, L. & Mattson, N. (2009) Truths and myths about the openness of EU trade policy and

the use of EU trade preferences.

54Keck, A. and Lendle, A. (2012).New evidence on preference utilisation.World Trade Organization

Economic Research and Statistics Division, Staff Working Paper ERSD-2012-12

55Candau, F., et al. (2004).The utilisation rate of preferences in the EU.

56Keck, A. and Lendle, A. (2012).New evidence on preference utilisation.World Trade Organization

Economic Research and Statistics Division, Staff Working Paper ERSD-2012-12

57CARIS.(2010). Mid-Term Evaluation of the EU’s Generalised System of Preferences. Nilsson, Lars. (2015). EU

exports and uptake of preferences: A First Analysis. Keck, A. and Lendle, A. (2012).New evidence on

preference utilisation.World Trade Organization

Economic Research and Statistics Division, Staff Working Paper ERSD-2012-12

58Eckart, N. (2006). Comparing EU free trade agreements: Rules of Origin.In Brief, No. 61. Available at:

http://ecdpm.org/wp-content/uploads/2013/11/IB-6I-Comparing-EU-Free-Trade-Agreements-Rules-of-Origin-

2006.pdf .